Over the next few articles, letls look at the needs of a specific type of investor – a Stage 3 one.

The 3 stages of investing

In an individual’s investing life cycle there are said to be 3 stages: Stage 1 is when you’re making investing a habit – arguably the most difficult stage, but starting something is always tough.

Stage 2 is managing for growth – you don’t need to live off your investments, so you need to allocate them appropriately between safety and growth and not bother about whether they’re yielding cash returns for you to spend.

Stage 3 is managing for income – when your other incomes have dwindled (you’re retired or about to) and you need your investment portfolio to start giving you a regular stream of income that you can live on. (Strange that both “live on” and “live off” mean about the same thing!)

Stage 3 investing – 4 imperatives

In Stage 3, you have 4 imperatives: one, your capital must remain safe and while you’re looking for return ON capital you must also safeguard return OF capital. That is, your investments (and your lifestyle) must not erode your capital, because your options of adding to your capital in the future are now diminishing.

Two, is that your returns should provide you with a predictable income stream that matches your expenses. That’s pretty obvious.

Three, is that you still need to manage for growth, because life expectancies are increasing and you need to ensure your capital continues to grow to at least match inflation. Putting all your investments only into income-generating options and ignoring the need to have them continue to grow is to ask for trouble some years down the road.

And four, is you need to choose tax-efficient strategies. If you are not liable to pay tax, you shouldn’t have to be in the position of having had tax deducted at source and then having to wait for a refund till your return is filed and assessed – a process that can take upwards of two years. And if you are liable to pay tax, it’s your right to structure your affairs in such a way that you minimise the amount of tax you pay, which affects your cash flow most favourably. Besides, who enjoys paying tax?

There’s an additional factor that you should consider – liquidity. How is easy is it for you to break the investment and take your money out should you need to do so in an emergency. This is not as critical because you can always arrange your portfolio to manage liquidity appropriately, but it’s worth keeping in mind because in an emergency sometimes your plans may go awry.

Stage 3 Investment options

So what investment options are available to a Stage 3 investor to meet these imperatives? Imperative 3, i.e., continuing to manage for growth is best achieved by keeping a portion of your portfolio in growth assets such as equity, but in this series we’re going to focus on the other imperatives of safety, income-generation and tax-efficiency with an eye always on liquidity. This means talking about safe and steady debt investment options.

There are (as always) a bunch of these, but the ones we’ll focus on over the next few articles are fixed deposits, fixed maturity plans (FMPs), short-term (or any-other-term) debt options, liquid schemes and tax free bonds.

There are other more esoteric and less-regulated ones such as hundis or bills of exchange, chit funds and so on, but precisely because they are more esoteric and less-regulated they quickly fall short of the primary of our four imperatives: safety. So, our advice with regard to these is simple: avoid!

Each of our chosen debt investment options comes in a variety of flavours and each merits some detailed discussion, so bear with us if this takes some time. We’ve always said investing is a long-term game!